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Monday, April 18, 2011

Is Doug McIntyre Right About the Benefits of Protective Tariffs?

Doug McIntyre is the host of Red Eye Radio, a nationally syndicated talk show known for letting callers talk about anything and everything. For the most part, the show is about politics, and McIntyre typically is of a conservative opinion. The show is generally entertaining and the debates and talks fascinating since McIntyre knows US History very well. I find myself agreeing with him most of the time, but there are a few issues about which I deeply disagree with him. The first that comes to mind, and most important I fell, is about his view of protective tariffs.

McIntyre frequently mentions, when talking about this subject, Japan, and how that country has used subsidies to grow its automotive industry. Because of those tariffs, he feels, the US automakers are basically unable to compete. As a result, the government should step in and use tariffs to make Japanese automobiles more expensive for US consumers. This will allow US automakers to compete and will also protect the automotive jobs that we already have. His position is not completely without merit. It is the same argument that has been made for centuries. Mercantile Europe formed its economic policies based on the idea. But were they better off for those protections?

The first example that comes to mind is the British and US relationship before and after the revolutionary war. Britain, to the American colonies, was essentially a parasite. The colonies would trade the goods that it had on its land, and the British would send back manufactured goods. The colonies were not allowed to manufacture anything at all, it had to be done on British land. It was assumed that this would be better for everyone involved since this would ensure that everyone had a trading partner. At the end of the revolution, though, these restrictions were gone and the US could manufacture goods. Instead of a decrease in trade due to the US now being able to manufacture, trade actually increased between the two countries. Where before the war there was basically a very high tariff on American manufactured goods, after the war the tariff was gone, and both countries were better off for it!

But why should this be? In a modern example, what does Africa have to offer the United States? How can it compete with what is the world’s most skilled workforce? David Ricardo solved the problem hundreds of years ago. What he came up with is today referred to as Comparative Advantage. It works as follows. Say the CEO of GE makes $15 million a year. He has a gardener whom he pays $15 an hour. Now, the CEO himself is not a bad gardener, and he would earn a wage of $20 a year if he worked as a gardener. Comparatively, the gardener would never be hired as a CEO. So the CEO has an absolute advantage over the gardener in terms of skill. However, it would be foolish for the CEO to work as a gardener. He makes much more money as a CEO. Because of this, the gardener has a comparative advantage against the CEO. So just because the CEO has more skills does not mean he will take both jobs. He will take the job that best suits him as will the gardener.

And this is what will happen with free trade with other countries. Even if they have subsidies that support certain industries, this does not mean that this country will be left without any work to do. It is nonsense. In order to support the subsidy, the Japanese government must suck away capital from other industries. This is an opportunity for foreign competitors. While the national industries of Japan must pay up to support the automobile industry, the US has a comparative advantage in those industries and can take over. This is where the jobs will come from even if there are subsidies in certain industries. A comparative advantage always exists. Mercantilism was abandoned long ago for good reason. Unfortunately it has come back in a major way, but the economies of the world grew at a much faster rate than we are today because they favored a better economic policy. Free trade is one of those better economic policies.

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About Me

I'm a teaching assistant in a microbiology lab at UCLA. I love baseball, especially the Dodgers, and I like to follow politics. I'm a libertarian, but more importantly my politics are internally consistent. I also enjoy a good beer.